Federal reserve rate hike: 3 implications for Sensex, Nifty

After the Federal Reserve hiked rates by 25 basis points to 1.75% on expected lines, the domestic markets back home started off on a positive note with the Sensex rallying nearly 100 points this morning. The rate hike is seen as a nuetral to positive for Indian stock markets.

History has shown that unless the real interest rates rise beyond 2.5% the markets can very well take these hikes into stride, HDFC Securities said. (Image: Reuters)

After the Federal Reserve hiked rates by 25 basis points to 1.75% on expected lines, the domestic markets back home started off on a positive note with the Sensex rallying nearly 100 points this morning. Earlier, top market voices had pointed out that a rate hike on expected lines could provide relief to the volatile Sensex and Nifty, while any surprises could add to volatility in the markets. The FOMC (Federal Open Market Committee) chaired by Jerome Powell who took over from Janet Yellen has raised interest rates and also forecast at least two more hikes for 2018, signaling growing confidence that U.S. tax cuts and government spending which is slated to boost the economy and inflation and lead to more aggressive future tightening. We take a closer look at key implications of US Fed hike on Indian stock markets.

Nuetral to positive for Sensex, Nifty

In a recent interview with FE Online, Anshul Mishra, Equity Fund Manager of Union Asset Management Company said that the stock market is slated to see heightened volatility in 2018, due to the rising global risk free rate. Notably, following yesterday’s rate hike, HSBC says that the 10-year US yields around 2.93% currently could see some consolidation, as the Fed retained its earlier inflation forecast. As the rates recede from all-time high levels HDFC Securities, sees this coming in as a neutral to positive for the Indian stock markets.

Markets can digest two more hikes

The Fed Reserve’s forecast of two hikes in 2018 will come as a relief to markets, says HDFC Securities. “ History has shown that unless the real interest rates rise beyond 2.5% the markets can very well take these hikes into stride. So we are not worried by the three hikes in 2019,” VK Sharma, Head PCG and Capital Market Strategy at HDFC Securities said in a note.

According to market experts, a more hawkish stance from the US could have added put additional pressure on India’s apex bank RBI to hike interest rates, which so far has kept the key policy rates unchanged. However, HDFC Securities says that the current hike will not burden RBI to hike rates.